Microcredit and the Poorest of the Poor:

Theory and Evidence From Bolivia

Sergio Navajas,
Mark Schreiner,
Richard L. Meyer,
Claudio Gonzalez-Vega,
and Jorge Rodriguez-Meza

Microfinance Risk Management

6070 Chippewa St. #1W, St. Louis, MO 63109-3060, U.S.A.
Telephone: (314) 481-9788, http://www.microfinance.com
and
Center for Social Development
Washington University in St. Louis
Campus Box 1196, One Brookings Drive, St. Louis, MO 63130-4899, U.S.A.

Abstract
We construct a theoretical framework that describes the social worth of a
microfinance organization in terms of the depth, worth to users, cost to users, breadth,
length, and scope of its output. We then analyze evidence of depth of outreach for five
microfinance organizations in Bolivia. Most of the poor households reached by the
microfinance organizations were near the poverty line—they were the richest of the
poor. Group lenders had more depth of outreach than individual lenders. The urban
poorest were more likely to be borrowers, but rural borrowers were more likely to be
among the poorest.

Authors’ Note
A later version of this paper appears in World Development, 2000, Vol. 28, No. 2, pp.
333-346.
 Microcredit and the Poorest of the Poor:
Theory and Evidence From Bolivia

1. Introduction

The professed goal of public support for microcredit is to improve the welfare of

poor households through better access to small loans. Often public funds for

microfinance organizations carry a mandate to serve the poorest (Consultative Group

to Assist the Poorest, 1995). For example, the Microcredit Summit in February 1997

rallied support to seek more than $20 billion to provide microcredit to 100 million of the

poorest households in the next ten years (Microcredit Summit, 1996).

Microcredit is the newest darling of the aid community. In Latin America, most

of the excitement is based on the fame of a few of the best microfinance organizations.

These include BancoSol, Caja Los Andes, PRODEM, FIE, and Sartawi in Bolivia; Caja

Social in Colombia; ADEMI in the Dominican Republic; Financiera Calpiá in El

Salvador; Compartamos in México; and ACP/MiBanco in Perú. Worldwide, the best-

known microfinance organizations are the Grameen Bank of Bangladesh and the unit

desa system of Bank Rakyat Indonesia (Yaron, Benjamin, and Piprek, 1997). Grameen

and BRI reach millions of depositors and borrowers, and many if not most are poor

women. A survey of 200 of the thousands of microfinance organizations worldwide

1
found 13 million loans worth $7 billion outstanding as of September 1995 (Paxton,

1996).

Although microcredit has claimed more and more of the aid budget, it may not

always be the best way to help the poorest (Buckley, 1997; Rogaly, 1996). The fervor

for microcredit may siphon funds from other projects that might help the poor more.

Governments and donors should know whether the poor gain more from more small

loans than from, for example, more health care, food aid, or cash gifts.

Is public support for microcredit wasted or worthwhile? No one knows. Most

measures of the impact of microfinance organizations fail to control for what would

have happened in their absence (Sebstad, Barnes, and Chen, 1995; Von Pischke and

Adams, 1980). If users borrow more than once, then they must get benefits. The

question, however, is not whether microfinance is better than nothing for its users. The

question is whether microfinance is better than some other development project for the

poor as a whole.

We construct a theoretical framework for rigorous thought about the social

worth of the output of a microfinance organization. The framework puts the standard

theory of project analysis in terms of the jargon of microcredit. By defining precisely

the social worth of service to the poorest, the framework helps to judge the trade-offs

between service to the poorest and service to others. The goal is to render more explicit

the judgements used to allot public funds.

2
 We also address three empirical questions with evidence from a comparison of

the poverty of a treatment group—borrowers of five microfinance organizations in La

Paz, Bolivia—with the poverty of a control group—the population of La Paz. The first

empirical question is whether microfinance organizations reach the poorest of the poor

(Gulli, 1998; Hulme and Mosley, 1996). We find that the five microfinance

organizations in Bolivia most often reached not the poorest of the poor but rather those

just above and just below the poverty line. The theoretical framework lays out the

conditions under which these microfinance organizations may still have been a good use

of public funds meant to help the poor.

The second question is whether group loans reach the poorest better than

individual loans. Although the theory is well-developed (Conning, 1997; Sadoulet, 1997),

less is known about when the assumptions of theory hold in practice. We find that

group lenders in Bolivia reached the poorest better than individual lenders.

The third question is whether rural lenders reach the poorest better than urban

lenders. Rural poverty is both wide and deep, but, compared with urban lenders, rural

lenders must deal with more seasonality, worse information, greater risks, less smooth

cash flows, longer distances, more diversity, and sparser populations. We find that the

share of the poorest in the portfolio was highest for rural lenders. We also find that

because the urban lenders had more borrowers, the share of the urban poorest who were

borrowers exceeded the share of the rural poorest who were borrowers.

3
 Section 2 below defines outreach. Section 3 briefly describes the empirical

methods. Section 4 compares the distribution of an index of the fulfillment of basic

needs for borrowers with the distribution of a similar measure for the population.

Section 5 concludes.

4
2. A Theoretical Framework for Outreach
Judgements of the performance of microfinance organizations have been based on

the concepts of outreach and sustainability (Yaron, 1994). Here, we express outreach

and sustainability in terms of the theory of social welfare. The purpose is to reconcile

the jargon of microcredit with the standard tools of project analysis.

Outreach is the social value of the output of a microfinance organization in terms

of depth, worth to users, cost to users, breadth, length, and scope.1 Outreach is

commonly proxied by the sex or poverty of borrowers, the size or the terms of loan

contracts, the price and transaction costs borne by users, the number of users, the

financial and organizational strength of the lender, and the number of products offered,

including deposits.

Sustainability is permanence. The social goal is not to have sustainable

microfinance organizations but rather to maximize expected social value minus social

cost discounted through time. In principle, sustainability is not necessary nor sufficient

for social optimality. In practice, however, sustainable organizations tend to improve

welfare the most. Most unsustainable microfinance organizations inflict costs on the

poor in the future in excess of the gains enjoyed by the poor now. Sustainability is not

an end in itself but rather a means to the end of improved social welfare (Rhyne, 1998).

Thus outreach stands for the social value of loans from a microfinance

organization, and sustainability helps to maximize expected social value minus social

5
cost discounted through time, including the net gain of users from loans and deposits,

the profits or losses of the microfinance organization, and the social opportunity cost of

the resources used. Sustainability affects outreach because permanency tends to lead to

structures of incentives and constraints that prompt all the groups of stakeholders in a

lender to act in ways that increase the difference between social value and social cost.

In principle, a complete evaluation would use cost-benefit analysis or cost-

effectiveness analysis to compare social value with social cost in general equilibrium. In

practice, it is so expensive to measure social value and social cost that almost all talk

proceeds in terms of outreach and sustainability in partial equilibrium.

2.1 Six aspects of outreach

2.1.1 Depth

Depth of outreach is the value that society attaches to the net gain from the use

of microcredit by a given borrower. Because society places more weight on the poor

than on the rich, poverty is a good proxy for depth. For example, society likely values

the net gain from a small loan for a street kid or for a widow more than the same gains

for a richer person.

Deeper outreach usually increases not only social value but also social cost. As

income and wealth decrease, it costs more for a lender to judge the risk of a loan. This

happens because, compared with the rich, the poor are more heterogeneous and less

able to signal their ability and willingness to repay (Conning, 1999). Fixed costs also

6
matter more for the poor because their loans are shorter and smaller and have more

frequent installments, renewals, and disbursements.

Deeper outreach increases only social value and not social cost when a lender

finds better ways to judge risk at a cost less than the savings from the better

judgement. Such progress increases access, the ability and willingness to borrow and to

repay at a price that covers the long-run cost of an efficient producer. Access is the

nexus of creditworthiness—demand based on ability and willingness to repay—and the

lending technology—supply based on an efficient way to judge creditworthiness. More

access is progress because loans depend more on the creditworthiness of the borrower

and less on the constraints of the lender to judge creditworthiness. For example, a

lender that does not need physical collateral to judge creditworthiness could serve

poorer users and thus have deeper outreach, all else constant, than a lender that

requires physical collateral.

2.1.2 Worth to users

Worth of outreach to users is how much a borrower is willing to pay for a loan.

Worth depends on the loan contract and on the tastes, constraints, and opportunities of

the user. With the cost to the user constant, more worth means more net gain.

2.1.3 Cost to users

Cost of outreach to users is the cost of a loan to a borrower. This is distinct from

the cost of a loan to society or from the cost of a loan to a lender. Cost to users

7
includes both price and transaction costs. Price includes interest and fees. Prices paid

by the user are revenues for the lender. Transaction costs are non-price costs. They

include both non-cash opportunity costs—such as the value of the time to get and to

repay a loan—and loan-related cash expenses such as transport, documents, food, and

taxes. Transaction costs borne by the user are not revenues for the lender.

The three aspects of depth, worth to users, and cost to users are tightly linked

but still distinct. Net gain is the difference between worth to a user and cost to a user.

It is the highest cost that the borrower would agree to bear to get the loan, minus the

cost that the borrower does in fact bear. In turn, depth of outreach reflects the social

value attached to the net gain of a specific person. For example, $100 of net gain for a

poor person may be worth more to society than $500 of net gain for a rich person.

Costs to users can be measured as the present value of the cash flows and

transaction costs associated with a loan. Worth to users is more difficult to measure.

Still, the relative worth of two or more loan contracts can be compared through their

costs. If a borrower has alternative sources of loans, then net gain can be measured as

the cost savings of a switch to a microfinance lender.

2.1.4 Breadth

Breadth of outreach is the number of users. Breadth matters because the poor

are many but the aid dollars are few.

8
2.1.5 Length

Length of outreach is the time frame in which a microfinance organization

produces loans. Length matters because society cares about the welfare of the poor both

now and in the future. Without length of outreach, a microfinance organization may

improve social welfare in the short term but wreck its ability to do so in the long term.

In theory, a perpetual source of support can allow a microfinance organization to

achieve length of outreach without sustainability (Morduch, 1998a; Woller, Dunford,

and Woodworth, 1998). In principle, such an organization could live a long time. In

practice, however, longer outreach through sustainability usually strengthens the

structures of incentives that serve to maximize expected social value minus social cost

discounted through time. Without length, borrowers have few selfish reasons to repay

because the lender cannot promise to lend again in the future. Loan losses shorten

length of outreach in a downward spiral. Likewise, lack of profits prompts employees to

strip the lender bare and to bask in perks before the chance is gone.

2.1.6 Scope

Scope of outreach is the number of types of financial contracts offered by a

microfinance organization. In practice, the microfinance organizations with the best

outreach produce both small loans and small deposits. Deposits matter for two reasons.

First, all poor people are depositworthy and save to smooth consumption, to finance

investment, and to buffer risk. In contrast, not all poor people are creditworthy. Second,

9
deposits strengthen the incentives for sustainability and length of outreach. Depositors

shun microfinance organizations if they do not expect them to live to return their

deposits. To attract and to keep deposits, a microfinance organization must please not

donors and government but rather users and regulators.

2.2 Trade-offs and feedback among the six aspects

Depth is the social value of worth to users minus cost to users. Breadth counts

users, length counts years of service, and scope counts types of contracts. These six

aspects of outreach are useful because direct measures of the social value of

microfinance are expensive. Outreach is worth minus cost, weighted by depth, summed

across breadth of users and scope of contracts, and discounted through length of time.

Social welfare depends on depth, worth, cost, breadth, length, and scope, but

the greatest of these is length. In particular, more length in the short term requires

more profit. This means higher prices, more cost to users, and less net gain per user. In

the long term, however, the trade-off may vanish if the push for length leads to

innovations in technology and organization that increase profits and/or increase worth

to users without parallel increases in social cost or in cost to users. Increased length

feeds back to decrease social cost because length gives users more selfish reasons to

repay. More scope also increases worth to users and strengthens the incentives that

boost length.

10
 The debate over the social value of sustainability hinges on the effect of length.

Microfinance organizations that do not aim for sustainability believe that the short-

term increase in net gain caused by low prices swamps the effects of reduced length

from low profits. Lenders that aim for sustainability believe the converse.

The rest of this paper looks at evidence of depth of outreach for five microfinance

organizations in Bolivia. Even if society cares only for the poorest, however, the

theoretical framework highlights that social welfare depends on more than only depth.

Breadth affects the number of the poorest served, and cost and worth to users affect the

net gain. The poorest can use not only loans but also deposits, not only now but also in

the future.

11
3. Poverty of Borrowers from 5 Bolivian Lenders

3.1 The organizations

By Latin American standards, Bolivia is a poor country. GNP per capita in 1997

was about $950 (World Bank, 1999). The income distribution was highly skewed, and

rural households in particular were very poor (UNDP, 1996). Still, Bolivia is a flagship

for microcredit in Latin America and in the world (Gonzalez-Vega et al., 1997a).

At the end of 1995, two of the five Bolivian microfinance organizations were

regulated, and three were NGOs. The three NGOs were Centro de Fomento a

Iniciativas Económicas (FIE), Fundación para la Promoción y Desarrollo de la

Microempresa (PRODEM), and Fundación Sartawi. BancoSol, the best-known

microfinance organization in Latin America, is a bank that was split off from PRODEM

(Gonzalez-Vega et al., 1997b; Schreiner, 1997; Mosley, 1996). Caja de Ahorro y

Préstamo Los Andes is a regulated non-bank (Rock, 1997).

The five lenders can be grouped by their lending technology and by their

geographic market niche. In lending technology, BancoSol and PRODEM lend to

groups, and FIE and Caja Los Andes lend to individuals. Sartawi works through

communities to lend to both groups and individuals. In geographic market niche,

PRODEM and Sartawi are mostly rural, while BancoSol, FIE, and Caja Los Andes are

mostly urban. Thus BancoSol lends to urban groups, PRODEM lends to rural groups,

12
and Caja Los Andes and FIE lend to urban individuals. Sartawi lends to rural groups

and rural individuals.

The differences in technology and in market niche among the five lenders reflect

their history of external support and the forces that spawned their creation. PRODEM

lends to groups because, when founded in 1987, it followed the model of the Grameen

Bank of Bangladesh. Although PRODEM worked at first in an urban market niche, it

later shifted to a rural focus so as not to compete with BancoSol, which inherited most

of the urban borrowers of PRODEM when it was split off in 1992. BancoSol was

created in part to mobilize large deposits from rich households and firms in order to

relieve the constraints on funds that had limited the growth PRODEM, in part to test

whether an NGO could become a commercial bank, and in part to mobilize small

deposits from poor households and firms. The development of both PRODEM and

BancoSol was heavily shaped by technical assistance from the Calmeadow Foundation

of Canada and from Acción International, a U.S.-based NGO with links to group

lenders in many countries in Latin America.

Caja Los Andes was founded in 1992 and has received funds from the Inter-

American Development Bank, GTZ of Germany, and the Swiss government. Its

individual loans reflect the influence of extensive technical assistance from the German

consulting firm Interdizciplinäre Projekt Consult. At first, Caja Los Andes lent mostly

13
for manufacturing in the belief that industry had the greatest effects on employment,

but it soon added loans for commerce.

When FIE started to make loans in 1988, its clients were urban artisans who

had completed classes with a training branch of the NGO. FIE only made loans for

manufacturing until 1993, when, like Caja Los Andes, it started to lend for commerce.

By 1995, the lending and training arms of FIE were separated. FIE is unique among the

lenders studied here because it has not had a single dominant donor nor a major source

of technical assistance.

Sartawi started to lend to rural communities in part because it already worked

with rural communities in non-financial development projects. The bulk of its funds

came from Plan Internacional, a rural-development NGO, and from the German

Lutheran Church. Like FIE, Sartawi has had little external technical assistance. It

separated lending from other activities in 1995. In Aymara, sartawi means to progress.

The five lenders have several traits in common. They all work in niches

untouched by traditional banks. All five make small loans to first-time borrowers and

bigger loans to repeat borrowers. All five charge high prices, and all five keep arrears

and loan losses low with various mixes of screening, monitoring, and contract-

enforcement. All five have received grants, technical assistance, and low-priced loans

from USAID and other donors. Still, very little of their success has been due to access

to funds from second-tier lenders in Bolivia. Compared with peers, all five have high

14
outreach and sustainability (Microbanking Bulletin, 1998). They all aim to reduce

poverty, but none explicitly targets the poor.

Bolivia, while sparsely peopled, may have the densest microcredit in the world.

The five microfinance organizations studied here are the most important of the about

30 in Bolivia. They account for more than half of both clients and portfolio outstanding

(La Razón, 1997).

3.2 The data

In November and December of 1995, we surveyed a random sample of 622 of the

more than 52,000 borrowers active with the five lenders at the end of September in the

urban areas in and near La Paz and in the rural Altiplano near Lake Titicaca. Of the

588 cases with complete data, 221 came from BancoSol, 124 from Caja Los Andes, 91

from FIE, 83 from Sartawi, and 69 from PRODEM (Gonzalez-Vega et al., 1996).

3.3 An index of fulfillment of basic needs

3.3.1 Conceptual issues

A vast literature explores the measurement of poverty (Lipton and Ravaillon,

1995). Here, we matched some questions in our survey of borrowers with questions in

1992 national poverty assessment (Ministerio de Desarrollo Humano, 1995). The

questions measured household use of goods and services thought to be linked with the

fulfillment of basic needs.

15
 The answers were condensed in an Index of Fulfillment of Basic Needs. This

approach is common in Latin America. It requires (Boltvinik, 1994):

(a) Theoretical definitions of basic needs and ways to satisfy them;

(b) Choices of observable proxies that indicate degrees of fulfillment;

(c) Norms that define the point where a need is considered unsatisfied;

(d) Aggregation of indicators to construct an index; and

(e) Choice of the poverty line for the index.

3.3.2 Empirical issues

The nationwide assessment picked the indicators, their norms, and the poverty

line. In most cases, the norm was the median of an indicator, but some cases had more

complex norms. Like all measures of absolute poverty, the poverty line and the norms

were at least somewhat arbitrary. The index was computed not for individuals but for

households. It had four parts:

(a) Housing:

Type of materials used for floors, walls and roof;

Number of people per room.

16
 (b) Access to public services:

Source of water;

Presence of an indoor toilet;

Access to electricity;

Type of fuel used to cook food.

(c) Education:

Years of school completed;

Current attendance in school;

Literacy.

(d) Access to health services:

Use of formal health care;

Use of informal health care.

Except for indoor toilets, the urban and rural norms were the same. The Index of

Fulfillment of Basic Needs (IFBN) was the simple average of the ratios of the four

observed indicators xj to their norms xjnorm:

1 4 xj
IFBN
·
. (1)
4 j
1 xjnorm

17
 The range of the ratio of xj to xjnorm depended on the range of answers in the

nationwide assessment. The indicator for education was the average of indices for

individual members of a household:

1 N yi  si
IE
· Li ,
N

(2)
i
1 yinorm  sinorm

where
IE
Index of education of the household ;
N
Number of members of the household ;
yi
Years of schooling for person i ;
si
School attendance dummy for the age of person i ;
yinorm
Norm for years of schooling for the age of person i ;
sinorm
Norm for attendance for the age of person i ; and
Li
Literacy dummy for person i .

The nationwide assessment set the poverty line at an IFBN of 0.9. Households

below this were poor, and the rest were non-poor. The non-poor were sub-classified as

fulfilled or threshold. The poor were sub-classified as moderate or poorest.

Our survey of borrowers included 56 percent of the indicators in the nationwide

IFBN. Most of what was omitted had to do with access to health care. We believe this

is highly correlated with the other indicators, so the comparison should not be biased.

18
4. Evidence of Depth of Outreach

4.1 The population of La Paz

Two features stand out about the shares of the population of urban and rural La

Paz in each of the four poverty classes (Table 1). The first is the extent of poverty. In

1992, more than half the urban households were poor, and almost all rural households

were poor. The second is the depth of rural poverty. Not only were 96 percent of rural

households poor, but 74 percent were among the poorest. In contrast, 17 percent of the

urban households were in the poorest class. Poverty in Bolivia, especially rural poverty,

was broad and deep.

4.2 Borrowers of the five lenders

4.2.1 Distribution of the IFBN

A box-and-whisker plot (Tukey, 1977) depicts the distribution of the IFBN for

borrowers of the five lenders (Figure 1). We do not have data for a similar picture for

the rural and urban populations. The IFBN is on the vertical axis. The poverty line is

at 0.9. The microfinance organizations are ordered from shallowest to deepest outreach.

The width of each box reflects the sample size for each lender. For example, the

box for BancoSol (n = 221) is wider than the box of PRODEM (n = 69).

The height of the boxes marks the interquartile distance, the range between the

second and third quartiles of the distribution. Less-disperse distributions have shorter

19
boxes. For example, the box for PRODEM is shorter than the box for Sartawi because

the distribution of PRODEM is more clustered near the median.

The whiskers beyond the boxes bracket either the extreme points in the data or

1.5 times the interquartile distance from the median, whichever is less. In a Gaussian

distribution, more than 99 percent of the data are inside the whiskers. The horizontal

lines beyond the whiskers mark outliers.

The grey trapezoids in the center of each box bound a 95-percent confidence

interval for the estimated median. FIE had the highest median. Half the sample of FIE

had an IFBN of more than 1.02, and the other half had an IFBN of less than 1.02. A

Kolmogorov-Smirnov test rejected the hypothesis that any of the distributions were

Gaussian, so differences in medians were tested non-parametrically with Wilcoxon rank-

sums (Hollander and Wolfe, 1973). The median of FIE (1.02) is greater than that of

Caja Los Andes (0.97) with more than 95-percent confidence. The borrowers of these

two urban individual lenders clustered just above the poverty line in the threshold

class. The median for BancoSol, the urban group lender, was at the poverty line (0.90).

This is less than the other two urban medians with more than 99-percent confidence.

The median rural borrower in Sartawi (0.71) and in PRODEM (0.67) were moderately

poor. The rural medians were statistically smaller than the urban medians, but they

were not statistically different from each other.

20
 The same pattern of three depths of outreach in suggested both by the Wilcoxon

rank-sum tests for differences in medians and by the non-parametric Kolmogorov-

Smirnov tests for differences in the distributions of the IFBN:

(a) Threshold group (FIE and Caja Los Andes);

(b) Poverty-line group (BancoSol); and

(c) Moderately poor group (PRODEM and Sartawi).

4.2.2 Distribution of the IFBN for borrowers versus the population

We compare the estimated distribution of the IFBN among the poverty classes

for the sample of borrowers from the five lenders with the known distribution of a

similar measure for all urban and rural households in La Paz (Table 1). Because the

estimated share of borrowers in a poverty class is a random variable, we report non-

parametric bootstrapped 90-percent confidence intervals (Efron and Tibshirani, 1993).

We do not expect the sample and population distributions to match because

creditworthiness and demand for microcredit depend in part on income and assets. All

else constant, lenders can judge creditworthiness for rich people easier than for poor

people. Suppose a lender drew borrowers at random from the subset of the population

that, given its lending technology, had demand and was creditworthy. Then the profile

of borrowers, compared with the population, would be skewed toward the rich.

We do not know the exact profile of demand and creditworthiness in Bolivia.

Still, we can answer four useful questions. The first asks whether the poorest had the

21
same share in the portfolio as in the population. The second asks how many of the

poorest were reached. The third and fourth questions ask how depth compared between

group and individual loan technologies and between rural and urban market niches.

4.3 Depth of outreach to the poorest of the poor

4.3.1 The share of the poorest in the portfolio and in the population

Of all households in urban La Paz, 45 percent were non-poor (Table 1). For all

three urban lenders, the point estimate of the share of non-poor households exceeded

the population parameter: 69 percent for FIE, 67 percent for Caja Los Andes, and 48

percent for BancoSol. The population parameter is within the 90-percent confidence

interval for BancoSol but not for FIE and Caja Los Andes. In rough terms, this means

we can reject the hypothesis that FIE and Caja Los Andes reached non-poor borrowers

in proportion to their population share, but we cannot reject this hypothesis for

BancoSol. For threshhold borrowers, all three urban lenders had a statistically bigger

share than the population. Caja Los Andes and BancoSol had a smaller share of

borrowers in the fulfilled class than did the population, and FIE had a bigger share.

For the moderately poor, the share was lower in FIE and in Caja Los Andes

(both 29 percent) than in the population (38 percent). The share for BancoSol was

higher than in the population (47 percent). For the poorest, the shares of all three

urban lenders (2 to 5 percent) were smaller than in the population share (17 percent).

Thus, compared with the population, the urban lenders lent less to the fulfilled and to

22
the poorest and more to the poorest of the rich (threshold) and, in the case of BancoSol,

to the richest of the poor (moderate).

The same pattern holds in rural La Paz. The non-poor were 5 percent of all rural

households but 14 percent of PRODEM and 13 percent of Sartawi. In all rural

households, 22 percent were moderately poor, and 74 percent were among the poorest.

For PRODEM, 54 percent were moderately poor, and 33 percent were among the

poorest. For Sartawi, 49 percent were moderately poor, and 36 percent were among the

poorest. All of the differences are statistically significant.

Except for the fulfilled class and for the moderately poor in BancoSol, the profile

of borrowers of each of the five lenders is, compared with the profile of the population,

skewed toward the threshold class. This does not prove much, however, about depth of

outreach. What matters is not whether the microfinance organizations reached the

poorest of the poor but whether they reached the poorest of those who demanded loans

and who were creditworthy. Our data cannot answer this question.

4.3.2 The number of the poorest in the portfolio

If a lender has broad outreach, then it might reach many of the poorest even

though they are not a big share of the portfolio (Rosenberg, 1996). Table 2 contains

point estimates of the share of the portfolio in a poverty class multiplied by the total

number borrowers from these lenders in La Paz.

23
 The five lenders reached about 4,500 of the poorest, 1,900 urban and 2,600 rural.

This number is derived from the relative share of the poorest in a portfolio and from

the absolute size of the portfolio. For example, the share of the poorest was about 4

percent in Caja Los Andes and about 5 percent in BancoSol. With about 30,000 total

borrowers, BancoSol served about 1,400 of the poorest, while Caja Los Andes, with

9,200 total borrowers, served about 370. FIE, with the lowest share of the poorest (2

percent) and the smallest urban portfolio, had about 120 borrowers among the poorest.

The rural lenders were smaller than the urban lenders, but the share of the

poorest in their portfolios was higher. The effect of the greater share swamped the effect

of the smaller portfolio. PRODEM, with about 2,500 borrowers in rural La Paz, served

about 800 of the poorest, more than twice as much as Caja Los Andes. Sartawi, with

about 4,900 borrowers, had about 1,800 among the poorest. This is 400 more than

BancoSol and almost as many as for all three urban lenders combined.

About 4,500 of the poorest households in La Paz had debt from the five lenders

in late 1995. Is this deep outreach? One way to check is market penetration, the ratio of

borrowers in a given class in a given lender to the number of households in that class in

the population (Table 3). In 1992, La Paz had about 260,000 urban households and

about 160,000 rural households (Ministerio de Desarrollo Humano, 1995). Of all urban

households, FIE reached about 2 percent, Caja Los Andes 4 percent, and BancoSol 12

24
percent. Of all rural households, PRODEM reached about 1 percent, and Sartawi

reached about 2 percent.

Penetration in the market as a whole matters less than penetration in that part

of the market with demand and creditworthiness. As before, we lack this data. Still, we

know that urban lenders reached 38 percent of threshold households, 19 percent of

moderately poor households, and 18 percent of all households. Given that not all

households want debt at all times, that not all households are creditworthy, and that

there are other microfinance organizations in urban Bolivia, this suggests scant room

for more market penetration in urban areas. The amount of slack in rural areas is less

certain. There, 12 percent of the non-poor and 4 percent of the poor had debt when

surveyed. This is much less than the urban penetration, but we do not know how much

is possible because rural microcredit is more difficult than urban microcredit.

The five Bolivian lenders reached the richest of the poor and the poorest of the

rich much more than they reached the poorest of the poor. This does not necessarily

mean that they did a bad job. A loan that is not repaid is a gift. Although there is

nothing wrong with a gift, a gift in loans’ clothing may backfire (Krahnen and Schmidt,

1994; Adams, Graham, and Von Pischke, 1984). Also, outreach depends not only on

depth for the poorest but also on breadth, worth to users, cost to users, length, and

scope for all users. These lenders have uncommon breadth, worth, cost, and length.

25
Furthermore, BancoSol and Caja Los Andes take deposits and so have especially wide

scope.

4.4 Depth by loan technology

Because both rural lenders use group loans, we look at technology only for the

urban lenders so as not to confound the effects of technology with the effects of market

niche. Compared with the individual lenders FIE and Caja Los Andes, the group lender

BancoSol had the smallest shares in the fulfilled and threshold classes and the biggest

shares in the moderate and poorest classes (Figure 1 and Table 1). BancoSol also had

the most market penetration, reaching almost one-fourth of the households in the

threshold class and 15 percent of the moderately poor (Table 3).

As a rule, the group-lending technology has more potential for deep outreach

because it can substitute joint liability for physical collateral. Joint liability has high

transaction costs, and it can also have high cash costs if borrowers must repay the

debts of their comrades. Still, group loans attract those who cannot or will not post

physical collateral. In contrast, individual loans appeal to richer borrowers who can

post physical collateral and who want to avoid the costs of joint liability.

BancoSol had both the deepest and the broadest outreach of the urban lenders.

This does not necessarily mean that BancoSol had the best outreach overall because the

comparison ignores cost to users, worth to users, length, and scope.

26
4.5 Depth by geographic market niche

At first glance, rural lenders seem to have deeper outreach than urban lenders

(Table 1). About 86-87 percent of the rural borrowers were among the poor, compared

to 31-52 percent for urban borrowers. In fact, this comparison is not valid because it

does not control for the different distributions of poverty in urban and rural areas.

Table 4 does control for this. Each cell is the share of the portfolio in a given

poverty class for a given lender divided by the share of the population in the poverty

class from Table 1. A ratio of more than 1 means that the share of clients in that class

was greater than the share of the population in that class. A ratio of less than 1 means

the opposite.

If the poor were more concentrated in a microfinance organization than in the

population, then the ratios in Table 4 would increase from less than 1 in the leftmost

columns to more than 1 in the rightmost columns. In fact, the pattern is the opposite.

For all five lenders, the ratios start near or above 1 in the leftmost column for the

fulfilled and exceed 2 for the threshold class. The ratios decrease for the moderately

poor and then decrease still more for the poorest. As seen before, the profile of

borrowers is skewed, not toward the poorest but toward those near the poverty line.

The details of the broad pattern differ, however, for rural and urban lenders. For

example, in the threshold class, no urban lender had a ratio above 3.0, while the ratio

27
for PRODEM was 4.8 and for Sartawi was 4.4. The rural lenders mined the few non-

poor households more intensely than the many poor households.

Among the moderately poor and the poorest, the rural lenders had higher ratios

and thus deeper outreach than the urban lenders. This is a puzzle. If rural lending is

more difficult than urban lending, then why did rural lenders have more depth? The

answer is probably that the urban lenders had not yet exhausted their non-poor niches.

In contrast, the lack of a large number of non-poor borrowers pushed the rural lenders

to the poorest. For rural lenders, the ratios of the share of the threshold class to the

population share is 4.8 and 4.4, and the ratios for the moderately poor class are 2.4 and

2.2. For urban lenders, the threshold ratios are between 2 and 3, and the moderate

ratios are near 1. The rural lenders serve the niches of the richest of the poor and the

poorest of the rich much more intensely than the urban lenders. The absolute number

of rural non-poor households is small, however, and so the rural lenders turn sooner and

more often to the most difficult of all clienteles, the rural poorest. The greater depth of

the rural lenders suggests that the urban lenders may not yet reach all of the urban

poorest who are creditworthy and who want loans.

In terms of market penetration (Table 3), the two urban individual lenders, FIE

and Caja Los Andes, had about 0.3 and 0.8 percent of the poorest households in their

portfolios. The urban group lender, BancoSol, served about 3 percent of the poorest. In

rural La Paz, PRODEM reached about 2 percent of the poorest, and Sartawi reached

28
about 4 percent of the poorest. Overall, about 4 percent of the urban poorest—and

about 2 percent of the rural poorest—borrowed from microfinance organizations. Thus

the average rural borrower was more likely to be a member of the poorest than the

average urban borrower, but the average urban household among the poorest was more

likely to be a borrower than the average rural household among the poorest.

29
5. Summary and Conclusions

We analyzed the depth of outreach of five microfinance organizations in La Paz,

Bolivia. The first step was to construct a theoretical framework in which depth is one of

six aspects of outreach. The second step was to compare the poverty of a sample of the

borrowers of the five lenders with the poverty of all the households in La Paz.

We found five main results. First, improved social welfare from microcredit

depends not only on depth of outreach but also on worth, cost, breadth, length, and

scope. Length matters most because the drive for length leads to incentives that prompt

improvements in the other aspects. Second, the lenders in La Paz tended to serve not

the poorest but rather those near the poverty line. Most microfinance organizations will

probably serve this same niche. The poorest are less likely to be creditworthy and to

demand loans, and many of the non-poor can borrow elsewhere. Third, because the

distribution of demand and creditworthiness unconditional on supply is unknown, we

cannot say whether the Bolivian lenders had deep outreach in an absolute sense.

Fourth, group lenders in La Paz had deeper outreach than individual lenders. In

general, group technologies have more potential for deep outreach because they

substitute joint liability for physical collateral. Fifth, the rural lenders in La Paz had

deeper outreach than the urban lenders in that the typical rural borrower was more

likely to be among the poorest. At the same time, the urban lenders had more market

penetration among the poorest due to their bigger portfolios.

30
 These results on depth of outreach do not tell whether the five microfinance

organizations did well in terms of all six aspects of outreach. On the one hand, perhaps

the drive for length and breadth is what prompted these lenders to grow and to have

some depth. On the other hand, perhaps these lenders would have reached more of the

poorest had they stayed small and unprofitable with a single-minded focus on depth.

The theoretical framework described here can help to improve social welfare by making

more explicit the judgements that back the choice of which focus to take.

The empirical results sketch some of the limits of microcredit for the poorest of

the poor. They highlight the need for more scrutiny of the flood of funds budgeted in

the name of access to loans for the poorest. Even when microcredit does reach the

poorest, it may not increase incomes as much as smooth consumption and diversify

income (Mosley and Hulme, 1998; Morduch, 1998b). Even if it turns out that

microfinance organizations do not reach relatively or even absolutely many of the

poorest, this shallow depth may be more than balanced by net gains that accrue to

those near the poverty line.

Microcredit may or may not be a good development gamble. If donors and

governments have social welfare in mind, then they should check whether microcredit is

the best way to spend public funds earmarked for development. Is microcredit

worthwhile or worthless? The theoretical framework here is a better way to judge this

than simple measures of the number of the poorest served by a lender.

31
Notes
1. This framework for outreach was first presented by Schreiner (1998) and has since been
used by Gonzalez-Vega (1998).

Acknowledgments
This research was supported by the Mission in Bolivia of the United States Agency for
International Development; Interdizciplinäre Projekt Consult of Frankfurt, Germany;
the Organization for Economic Co-operation and Development; the Department of
Agricultural, Environmental, and Development Economics at The Ohio State
University; and the Division of Asset Building and Community Development of the
Ford Foundation. We are grateful for helpful comments from an anonymous referee,
Jonathan Conning, Jonathan Morduch, Irene Sievers, and Manfred Zeller, as well as
discussion with participants at the meetings of the American Agricultural Economics
Association and of the International Association of Agricultural Economists. We thank
the employees and borrowers of BancoSol, Caja Los Andes, FIE, PRODEM, and
Sartawi for their cooperation and hospitality. This is an extensive revision of the paper
“Does Microfinance Reach the Poorest of the Poor? Evidence From Bolivia.” In turn,
this was an extensive revision of “Do Microfinance Organizations Reach the Poor in
Bolivia?”, itself an extensive revision of “Poverty and Microfinance in Bolivia.”

32
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Table 1: Point estimates and bootstrapped non-parametric 90-percent confidence intervals
for the distribution of the Index of Fulfillment of Basic Needs among poverty classes
for borrowers from five microfinance organizations in La Paz, Bolivia, and for all
households in urban and rural La Paz

Non-poor Poor
n Fulfilled Threshold Sub-total Moderate Poorest Sub-total
Range of index 2.0 to 1.1 1.1 to 0.9 2.0 to 0.9 0.9 to 0.6 0.6 to 0.0 0.9 to 0.0
Urban La Paz 436 28 17 45 38 17 55
FIE 91 26—35—44 25—34—43 62—69—77 21—29—36 0—2—5 23—31—38
Caja Los Andes 124 14—19—25 40—48—55 60—67—73 23—29—35 2—4—7 27—33—40
BancoSol 221 12—16—20 27—33—38 43—48—54 42—47—52 2—5—7 46—52—57
Rural La Paz 152 2 3 5 22 74 96
PRODEM 69 0—0—0 6—13—20 6—13—20 43—54—64 24—33—43 80—87—94
Sartawi 83 0—2—5 7—12—18 8—14—20 40—49—58 28—36—45 80—86—92

All figures are percentages. Point estimates and census parameters are in boldface, and 90-percent confidence bounds for
the point estimates are in regular typeface. The figures for the population of urban and rural La Paz do not have
confidence intervals because they are not estimates but rather parameters from a census (Ministerio de Desarrollo
Humano, 1995). The figures for the lenders were computed from the survey by the authors. Rows may not sum to 100
due to rounding.

37
Table 2: Estimated breadth of outreach by number of clients in a poverty class for
borrowers from five microfinance organizations in urban and rural La Paz

Non-poor Poor
Fulfilled Threshold Sub-total Moderate Poorest Sub-total Total
Urban La Paz 8,500 16,000 25,000 18,000 1,900 20,000 45,000
FIE 1,900 1,900 3,900 1,500 120 1,600 5,500
Caja Los Andes 1,800 4,400 6,200 2,700 370 3,000 9,200
BancoSol 4,800 9,800 15,000 14,000 1,400 15,000 30,000
Rural La Paz 120 1,000 1,100 3,700 2,600 6,300 7,400
PRODEM 0 360 360 1,300 800 2,100 2,500
Sartawi 120 650 770 2,400 1,800 4,200 4,900
Total La Paz 8,600 17,000 26,000 22,000 4,500 26,000 52,000

Survey by the authors and Table 1. Rows and columns may not sum to totals due to rounding.

38
Table 3: Market penetration by poverty class for five microfinance organizations in urban
and rural La Paz

Non-poor Poor Total

Fulfilled Threshold Sub-total Moderate Poorest Sub-total
Urban La Paz 12 38 22 19 4 14 18
FIE 3 5 3 2 0.3 1 2
Caja Los Andes 3 10 5 3 0.8 2 4
BancoSol 7 23 13 15 3 11 12
Rural La Paz 5 15 12 11 2 4 5
PRODEM 0 0.2 0.07 1 2 2 1
Sartawi 0.2 2 0.7 2 4 3 2

All figures are percentages computed from Tables 1 and 2 and from Ministerio de Desarrollo Humano (1995). The figures
for urban and rural La Paz are not population parameters from a census but rather totals for all the microfinance lenders
in an area combined. Numbers may not sum totals due to rounding.

39
Table 4: Ratios of the IFBN for clients of the five microfinance organizations to the IFBN
for the urban and rural population of La Paz

Non-poor Poor
Fulfilled Threshold Sub-total Moderate Poorest Sub-total
Urban La Paz
FIE 1.2 2.1 1.6 0.7 0.1 0.5
Caja Los Andes 0.7 2.9 1.5 0.8 0.2 0.6
BancoSol 0.6 2.0 1.1 1.2 0.3 0.9
Rural La Paz
PRODEM 0.0 4.8 3.2 2.4 0.5 0.9
Sartawi 1.6 4.4 3.5 2.2 0.5 0.9

Computed from Table 1 as described in the text.

40
Figure 1: Box-and-whisker plot of the distribution of the IFBN for sampled borrowers from
the five microfinance organizations in La Paz, Bolivia

IF B N
2 .0

0 .9

F IE C aja L o s A n de s B a nc o So l PRO DEM S ar taw i

41